For my first article I am focusing on well known retailer JB Hi-Fi (ASX:JBH). JB Hi-FI enjoys a StockRank™ of 98 which includes a Quality rank of 99. This will not come as a surprise to those who have followed the stock since it first listed in 2003, or indeed to anyone who has walked through a shopping mall in the last decade.
Despite the challenges of lockdowns, JB Hi-Fi, along with many other retail businesses, prospered during the pandemic as consumers had limited options to spend, with travel and entertainment greatly restricted, so instead they indulged themselves by buying stuff.
But now retailers appear to be facing tougher times. On the demand side, not only has the services side of the economy opened up, but consumer confidence looks like it may decline. Interest rates are rising and house prices are declining. This is expected to crimp demand as consumers need to tighten their belts.
On the cost side, wages are rising due to low unemployment and award wage increases of 4.6%, plus a 0.5% increase to superannuation, that came into effect in July. Rents are also rising as many are tied to CPI which was at 7.3% in the September quarter.
As a consequence of these forces, most market analysts are forecasting tough times ahead for the major retail stocks with reduced sales and increased costs leading to significant reductions in profits over the next two years.
JBH is now the second largest listed retailer in Australia outside the food sector, only surpassed by Wesfarmers. Revenue is A$9.2 billion and market capitalisation is A$4.9 billion. The business has been well run for many years, with revenue having increased every year for the last 10 years at an average compound rate of 11.4% per annum. Analysts are predicting that this streak of revenue increases will finally expire in 2023, but they have been wrong before.
Market analysts are forecasting revenue to ease slightly in 2023 followed by a fall of 2.5% in 2024. Two months ago the forecast declines were greater, so already the negativity is starting to moderate.
Profits are forecast to take a bigger hit than revenue. JB Hi-Fi trades on single digit net profit margins and even in the bumper year of 2022 only managed a margin of 8.4%. This means that small changes can make a big difference to the bottom line. As…
